Last month we purchased Fidelity Limited Term Bond (FJRLX) in our model portfolio. Part of our strat...
2 Income Funds Worth Buying Now
06/29/2011 8:30 am EST
Younger investors would do well to put their risk with this stock-heavy managed fund, while older, more conservative types should consider its bond-heavy cousin, recommends Richard Young of the Intelligence Report.
I want you to buy Vanguard Wellington Fund (VWELX). It is one of the oldest US funds, having been launched in 1929.
The fund is set up with the opposite allocation of my often recommended Wellesley Income Fund (VWINX). Rather than a 40%-stocks-to-60%-bonds allocation, Wellington employs a 60%-stocks-to-40%-bonds allocation.
I'm recommending Wellington for subscribers in their 40s and late 30s. I advise those in their 50s and older to favor Wellesley.
In an interview, Edward Bousa, manager of the Wellington Fund equity portfolio, laid out the fund's advantages. First on the list was one I often cite—and the market often misses: simplicity.
As Bousa said: "I think that some of the things that have made the fund so successful really have revolved around the simplicity of the product."
When asked about the types of equities Wellington buys, Bousa first listed above-average yielders, and then what he called supply-and-demand stocks, which he explains are stocks of "companies that are in industries or sectors where we think supply and demand will be in favor for a long time. Typically, we look back over 20 years to see where industries are, relative to capital spending, depreciation, capacity, and other kinds of demand from outside of the US."
Finally, Bousa noted that the fund looks for what he called broken-growth stocks—stocks where companies are growing, but whose prices have been beaten down by the market for one reason or another.
The bond portfolio is steady as she goes. Bousa explains the mandate of the portfolio's fixed-income component, managed by John C. Keogh, is to "provide steady, positive returns as best as possible by not taking undue risk."
The avoidance of risk is what should make you stand up and take notice here. Wellington invests in investment-grade corporate bonds and has some exposure to Treasuries, agency bonds, and mortgage-backed securities. Historically, the Wellington Fund has earned 80% of the market return with less risk.
You should never simply look at past performance in order to pick funds. If you did, you'd likely lose your shirt. The fastest way to earn $1 million in mutual funds is to invest $2 million in yesterday's winners.
But you should take note when a fund's strategy has protected its principal and earned investors strong average returns over a long period of time. An investment of $10,000 in Wellington in 1929 would be worth $6.5 million today.
The Wellington Fund's strategy isn't based on astrological stock-picking games or boiler-room trading strategies. It is based on diversification, avoidance of risk, and targeted value investing.
As with all my recommended funds, Vanguard's Wellington Fund has no loads or 12b-1 fees attached. The expense ratio for Investor Shares (below $50,000 invested) is 0.30%, and for Admiral Shares it is 0.22%.
In October, Vanguard announced that it was lowering the balance minimums for Admiral Shares of many of its funds. The Admiral Shares minimum investment of many actively managed funds, like Wellington, were lowered to $50,000 from $100,000.
Now more investors can enjoy the super-low 0.22% expense ratio. Avoiding high expense ratios is one of the best ways for you to improve your portfolio's performance.
Buy Vanguard Wellington Fund if you're under 50 years old and want a low-risk alternative to an all-stock portfolio. Enjoy the low expense ratio that leaves more money in your account, as well as the asset-class diversification that protects you from market upheaval.
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